Public corruption vs. Private corruption – Brazil

Much is said about “public corruption”, but almost nothing is said about “private corruption”. To begin with, what would be the difference between one and the other? And if we look at it in the terms of Brazil, which one would be the biggest? Is corruption the biggest problem in Brazil? Let’s go to the analysis.

It is common to hear an affirmative answer when asked if corruption is Brazil’s biggest problem. But what would be the rationale? When a statement lacks foundation, it is a myth[i], comparable to religious faith dogmas. Would this statement (corruption is Brazil’s biggest problem!) be a myth? In that sense, we will look for elements to make an evaluation.

To assess this question, we need 3 elements: define what we mean by corruption (delimit the scope), look for value estimates for corruption (for major/minor comparison), and point/compare with another problem (the lower value).

In a concise way, in the tax field we can define corruption as the diversion of public resources. Since it is a detour, we need to consider the route taken by the public resources, seeking to cover the different moments or stages where the public resources are or can be diverted.

We will use a practical example to facilitate the explanation. A person goes to a store and buys a cell phone for 1,000 reais. This value includes consumption taxes (ICMS, IPI, COFINS, etc), which we can hypothetically define as R$200.

The person who bought the cell phone paid 800 reais for the device and 200 reais in taxes, since those 200 reais were given to the merchant (legal entity). This merchant should deposit those 200 reais in the State’s account at the end of the month. In other words, this merchant has 200 reais of public resources in his company’s cash box until they are deposited in the State’s account.

After the month, the merchant pays the 200 reais into the state account, from which time the public administrators use this money to pay for the different public services, such as teachers’ and police officers’ salaries, pensions, basically for individuals, or public works, such as roads, or even tax benefits, basically for legal entities.

In this sense, and seeking to address this assessment of diversion of public resources, the important thing is to highlight two flows:

  • the first flow, where public resources circulate from the taxpayer to the State’s cash office (mainly from legal entities and individuals), and

  • the second flow, where public resources move from the State’s treasury to public service providers or final beneficiaries (also legal entities and individuals).

In these two flows, diversions of public resources may occur. In the first flow, using the example above, the merchant, instead of depositing the 200 reais in the State’s account, diverts that public resource to his company, for his own benefit. In the second flow, after the 200 reais entered in the State’s cash flow, the public agent diverts this resource for its own benefit in the form of a work with a surcharge, for example.

Although, in both situations, it is a matter of diversion of the same public resources, the “market” (or who would it be?), with the consent of economists, gave different names to these diversions. When public resources are diverted in the second flow (after having entered the state’s cash box), it is called corruption. When public resources are diverted in the first flow (before they enter the State’s cash box), it is called evasion. Regardless of the reasons that based this differentiation on the nomenclature, it is verified that, in practice, this differentiation creates in the collective imaginary the impression or conviction that private corruption does not exist.

I would say that this decision to give different names to the same diversion of public resources makes it difficult to understand the phenomenon of corruption, which is why, in order to facilitate understanding, I suggest the adoption of the following nomenclature:

  • “Public Corruption” for the diversion of public resources occurring after the resources have been deposited in the State’s treasury, and

  • “Private Corruption” for the diversion of public resources that occurred before the resources entered the State’s coffers.

Once the stage of defining what we understand by corruption has been overcome, let us move on to the second stage, that of the search for estimates of corruption values in Brazil. It is obvious that corruption is difficult to measure, but there are studies that seek to do so and that help to base a better understanding of the issue.

For public corruption, for example, the article “Corruption is not the main drain on public money in Brazil”, based on a study by economist Claudio Frischtak on overpricing in infrastructure works, concludes: “If we divide the highest value by the 45 years researched, it gives an average of R$6.66 billion per year”.[ii] With the objective of comparison, even knowing that infrastructure works are known as the main form of diversion of public resources, we are going to multiply by 10 the value presented, estimating the diversion of public resources after entering the State’s treasury at 60 billion/year.

On the side of private corruption, the most relevant study is that of SINPROFAZ, known as Sonegômetro, which estimates annual evasion in Brazil (private corruption) at values close to 600 billion reais per year.[iii]

Thus, the annual value of public corruption would be R$60 billion and the annual value of private corruption would be R$600 billion. At this point, a final macro comparison is in order: how much do these deviations of public resources represent in the total collection of the country, summing the three levels of government? The Brazilian tax burden is about 33% of the GDP (6 trillion Reais x 33%), approximately 2 trillion Reais. Comparing public corruption (60 billion Reais) and private corruption (evasion – 600 billion Reais) with total revenue (2 trillion Reais), it is verified that public corruption represents approximately 3% of total revenue while private corruption represents approximately 30% of total revenue in Brazil.

Putting it another way, if public and private corruption were eliminated (it is known that in practice this is impossible – all countries have some level of corruption) the total collection would jump from R$2,000 billion to R$2,600 billion per year (the R$60 billion of public corruption has already been collected – it would not increase the total collection).

Considering only the elimination of public corruption, practically the only one attacked in the media, the 60 billion reais of the 2,000 billion reais collected annually (3%) would be properly applied, which, in the words of the author of the article cited above, “would not bring greater balance to public accounts, or would be a relevant source for new public needs or better coverage for social demands”, so that, “contrary to the popular imagination, it is not enough to return what was ‘stolen’ to attend to the emergencies of the country’s poorest population”. However, if the share of private corruption (evasion – 600 billion reais – 30% of the collection) is added, this table presents an expressive alteration with the power to influence in a relevant way the balance of public accounts.

In conclusion: in the scope of the commonly used nomenclature, the deviation of public resources represented by the problem of evasion (600 billion reais) in Brazil is 10 times greater than the problem of corruption (60 billion reais). The answer to the initial question is:  corruption is NOT Brazil’s biggest problem, as corruption is about 10 times less than evasion. Based on the above values, it can be concluded that the statement “corruption is Brazil’s biggest problem” is one more of the many myths of the fiscal context that circulate freely and strongly in the imagination of a large part of the Brazilian population, especially that part of the population that has as its main or only source of information the practical monopoly of the Brazilian press.


[i] A Myth works this way: someone creates it, others repeat it and others credit it and pass it on. And the more the narrative is heard without reflection, the more the myth becomes incontrovertible and turns into truth.

[ii] Corruption is not the main scarcity of public money in Brazil – https://www.conjur.com.br/2017-out-26/ricardo-lodi-corrupcao-nao-principal-ralo-dinheiro-publico#sdfootnote11sym

[iii] Sonegômetro – http://www.quantocustaobrasil.com.br/

 

 

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